RBA to remain on hold over coming months

The RBA is expected to remain on hold over coming months, but maintain a mild easing bias in order to keep downward pressure on the AUD. Governor Stevens has communicated a higher hurdle to consideration of further easing in his speech of 22nd July in which he warned of further financial risk-taking. The governor put particular emphasis on "financial sustainability" in terms of guiding the medium term policy outlook. He also suggested that lower population growth may mean that Australia's trend rate of growth might be lower than current estimates of 3.0-3.25%. If so, there is less spare capacity in the economy than previously though. This would weaken the argument for even more accommodative policy. The Bank will update forecasts in the Statement on Monetary Policy on Friday 7th August. 

"We are not convinced the bank will make a significant cut in growth forecasts considering May forecasts were based on an AUDUSD assumption of 0.80 and a TWI at 65 (current around 0.73 and 61.4)," says BofA Merrill Lynch.

The GDP forecast for the end of 2015 GDP is currently 2.5%. The Bank appears to be comfortable with the AUD's adjustment, while further weakness is both "likely and necessary."